Over the last week I have been asked a few times - are the problems at Satyam an exception or are they representative of the whole Indian outsourcing vendor sector?

My answer - a periodic review of vendors is always healthy, but most of the other larger Indian firms are set up and run differently than Satyam was.

TCS is part of the Tata family - India's largest conglomerate with assets in virtually every industry and every country in the world. In this global economy, nothing is rock-solid, but Tata comes close. Infosys has traditionally received kudos and awards for its financial reporting transparency and professional management. Cognizant is a US firm, spun out of Dun and Bradstreet, and run professionally from the start. Wipro, for practical purposes is a private firm with the CEO and family owing the majority of the stock. Some companies do not like dealing with private firms - not enough financial transparency. But that is a vastly different issue than mispresentation of financials.

Of course, there are plenty of smaller Indian outsourcing firms which are family or otherwise tighly controlled and may not have seen rigorous scrutiny from regulators or auditors. I expect this is going to be a subject of intense discussion at the annual Nasscom conference coming up in Mumbai February 11-13.

As they say sunshine is the best disinfectant there is. So this increased spotlight is healthy. But we need to be careful and not get paranoid about extrapolating Satyam's issues to the whole industry.

As I wrote earlier, the Satyam meltdown will have its customers scampering. But the offshoring market has cooled down substantially. As I wrote a few weeks ago

"the rupee has depreciated (so the firms make more in dollars), the
India labor market has cooled off substantially, and much of the work
in a recession is sustaining, not enhancing. Add to that at least some
nervousness about India about the recent attacks in Mumbai..."

So, yes there will supply side disruption, but nothing like it would have been in a much more torrid market a year or two ago.

Update: NY Times talks about how it will benefit Satyam's competitors. Of course there will be disruption to exisiting Satyam customers, but overall at $ 2 billion in revenue, it is less than 5% of IBM's outsourcing revenues, and .5% of the global outsourcing market. Looked at from a macro perspective it is a blip - and customers should be wary of vendors opportunistically using it in price discussions.

said a competitor of Satyam in an email to me. No gloating - just coming to
terms with what the meltdown and negative press meant even to his firm. A Satyam employee, in an
understatement, emailed me he was "shocked beyond words".

Plenty of conversations today about Satyam including one with Brian Sommer he blogged about here. My focus, all day, has been around
what it means to Satyam customers.

In an ideal scenario someone could buy Satyam, promise stability to its
employees and most customers would adjust to life under the new owner. But given
the lack of transparency on what is real at Satyam, and given the lawyers
circling, the entity as a whole is in a word - toxic. So the next logical
scenario is a carve-up - with firms buying up selected technology or geographic
practices. This is what happened in the post-Enron Arthur Andersen shut down
process. But the most likely scenario - various firms will just selectively pick
off employees at Satyam, and hope they can help acquire its customers - a
potentially cheaper way to get to that revenue potential.

The dominant scenario, if it transpires, translates to a nightmare for Satyam customers. While
their attorneys should be able to free them for any multi-year contracts (by
arguing, for example, Satyam may be technically insolvent - many MSAs have an out clause for that and other changes in vendor status), it's not a simple
case of calling up TCS or Accenture and asking them to take over the contract.
Knowledge transfer from Satyam employees will take weeks if not months - while traumatized
Satyam employees search for their personal safe harbors. Also,
from my experience, Satyam priced many of its contracts aggressively - so moving
away may mean an unplanned budget increase or service level reduction.

It is a sad day for India Inc. Even sadder day for Satyam customers. But no point crying - they need to kick start a contingency process to somehow retain their Satyam talent and service level or rapidly transition away from it.

"In what appears to be the first round of renegotiating their outsourcing
contracts after a slower economic growth impacted their business, customers such
as Best Buy, Visa and Conseco are seeking significant rate cuts from their
Indian suppliers."

The article then cites cuts in the range of 3 to 7%.

That's all?

Brace yourself for X times that as companies argue the rupee has depreciated (so the firms make more in dollars), the India labor market has cooled off substantially, and much of the work in a recession is sustaining, not enhancing. Add to that at least some nervousness about India about the recent attacks in Mumbai, and more rollbacks are going to be expected.

Anshu Sharma uses the Economics Nobel Prize winner's scale concepts to explain India's success vis a vis other countries when it comes to low-cost country outsourcing.

I would agree - if you are looking for 10, 50, 100 resources a number of countries are actually more attractive when it comes to infrastructure, geographic proximity etc. But India pulls away when you are planning for a larger head count.

But scale does not explain it all. English language skills (the unique "bobblehead version") and process maturity (CMM, Six Sigma) etc are two other reasons cited by a number of customers who evaluated multiple destinations.

My recent complaint with many Indian vendors is they have actually not used the scale India provides them to provide "fuel hedges" against wage and currency inflation. It will be tough to pass along those increased rates in a recession.

If anything with the rupee depreciating, rollbacks are in order. I am sure somewhere in Paul's economic papers, we would find justification in that.

But look closer. First big international win for AT&T. T-Systems supporting data centers around globe. Another sign the telcos are becoming global. And EDS not doing the data center stuff - long its core competence. Roughly $ 800 million a year for major IT infrastructure for a $ 400 billion revenue run rate company. The benchmark of .2% of revenues will make most peer CIOs salivate.

But look again. Under their cover and program management, these 3 vendors will have hundreds of other vendors, contracts, SAP instances, etc. Unless Shell has re-defined the governance and vendor management game book, expect the age-old finger pointing. And margins that come from the tiered technology supply chain. So the deskside, messaging and mobile support for its 150,000 users will average by my estimates over $ 100 a user a month. The higher price of staying with the more traditional on-premise, Microsoft centric technology.

Brian Sommer summarizes what he learned in a recent meeting focused around services procurement. I think he is far too generous about the sophistication in procurement practices around services.

This comment is particularly telling "No consistent definition exists for professional services or
consulting. Sourcing executives find it tough to apply a single set of
practices that apply to the full breadth of services that companies
procure."

Just around IT services (as against legal or architectural services) there are distinct markets around contracting/staff supplementation, systems integration, application management outsourcing (and offshoring), infrastructure outsourcing, and BPO. The players are different (look at the different ways different offshore markets are evolving), the things to look for are vastly different (ITIL and utility models in infrastructure outsourcing versus time tracking around contractors), the price points are widely different. And markets are morphing as everything gets delivered "as a service" - so software, hardware, telecom companies all offer variants of IT services.

No single sourcing process or sourcing technology can handle it all. Or should be expected to handle a services market which totals spend of over $ 500 billion a year.

I know I am being critical of my own clients in saying so, but like I wrote here, I wish more procurement folks would treat IT spend, not just IT services, as very different from MRO or other direct spend, not just try to find homogeneous "solutions" . Lots of empty calories in the spend.

The good news is there are plenty of disruptive vendors and business practices and tools waiting to be leveraged. But they are often at sub-categories and niches of markets. Tough to discover them if you seek a "single set of practices".

I am summarizing feedback I received from last week's Nasscom Leadership Conference in Mumbai which I had planned to attend but could not. The feedback is from several buyer executives (who prefer to not be named); Malcolm Frank, SVP of Marketing and Strategy at Cognizant; Harish Jagtiani, President of Intermark, which represents Ovum, Dow Jones and other research/media firms in India and from published notes from Ed Caso, Senior Analyst covering IT Services at Wachovia Bank and Bruce Richardson, Chief Research Officer at AMR Research.

a) Offshore world "not coming to an end"

Was Ed's assessment - he found the mood much more positive
than he expected given
the state of the US economy and the dollar weakness impact on rates. Harish reports most Indian vendors are increasing
their marketing staff and "large deal teams" to chase bigger
opportunities. There is life beyond the US market. There were
several British buyer organizations at the conference. Malcolm reports the German finance sector in particular is bright. The Indian market, long
ignored by most of the offshore providers, is starting to be attractive
in particular in pharma, auto and finance. China and rest of Asia are
growing markets. The Middle East, flush with the rise in oil prices, is
a significant opportunity. Egypt's trade reps were visible at the conference
and several Indian firms are looking at partnerships to use their
Arabic skills in that market.

b) "Hangover from the party"

Much more sober mood after the go-go years earlier in decade ,
said Malcolm who is a regular at the conference. Bruce summarized "while we were happy to escape from New England
winter, we couldn't help feeling that maybe we brought some of the
Arctic air with us..."

c) Big Western firms - "the elephant in the room"

While IBM and Accenture report their largest labor pools are now in India, they and other western firms like EDS (with a major presence in India with its MphasiS acquisition) and Cap Gemini (with its Kanbay acquisition) were not as well represented at the conference. One possible explanation - Nasscom continues to be an "old boy" network and the early founders of Indian firms still get the best speaking slots. But as Malcolm points out the "progress Accenture and IBM have made in just last couple of years, has everyone's attention".

d) Supply side concerns persist

Buyer input - Indian firms still are not taking the staff turnover and wage inflation issues seriously enough. The strategy of hiring from secondary and tertiary cities is not making much of impact - at least not in high quality resources. As I have written before, the strategy of hiring mostly out of engineering schools and training them takes too long to produce truly productive resources, especially with vertical or process knowledge. More buyers want diversification beyond India. They would prefer to go through an existing Indian or Western firm, rather than find a new offshore player in China or E. Europe. Another complained the customer account management layer in Indian firms continues to be poor and another talent area which needs focus.

e) Lots of Innovation talk, but not much to show yet

Buzzword at the conference, but little real progress. One speaker at the conference exhorted the industry to start thinking of products, not just services - like the new Tata Nano. A buyer wanted more presence around emerging technologies. The majority of Indian firms do better as markets mature around more defined software segments from ERP to SOA. Another buyer said very few non-Indians are moving to India on tours of duty. Till that happens, India will struggle to truly create "innovative" offerings. Harish points out that Som Mittal is taking over as Nasscom President - the first senior IT executive to run that job. He ran HP's development centers in India and may bring a broader infrastructure and non-software focus to the industry.

Thanks to all my "analysts" who contributed to this post. As I mentioned last week, if Indian firms can deliver from a distance, we can similarly analyze them from a distance, sans jet lag -)

I have seen this study quoted in CIO magazine, WSJ and a couple of blogs. It is by 2 professors at U. of British Columbia and one at the Paris School of Economics. And it focuses on the impact of distance on services purchasing.

A major conclusion "The calculations reveal that, from the point of view of a London
service purchaser, workers in Oxford can be paid 99% to 373% more than
workers in Bangalore in productivity-adjusted wages and yet still be
more attractive, once service-delivery costs are taken into account.
This is because the Bangalore workers are 100 times more distant from
London than the Oxford workers."

Do readers in London agree that employers would pay as much as 4 or 5X for local technical or process talent what they could pay in Bangalore?

Also since Bay area is just about the same distance away as Bangalore (a little over 5,000 miles from London), would they pay that much of premium for say, local web 2.0 talent which the Bay area has a sizable pool of talent around?